title
ACCEPT THE QUARTERLY INVESTMENT REPORT FOR QUARTER ENDED MARCH 31, 2024
recommended action
RECOMMENDATION
It is recommended that the City Council accept by motion the Quarterly Investment Report for the quarter ended March 31, 2024.
body
Summary
Pursuant to California Government Code section 53646 and the City’s Investment Policy (Policy No. 17.01.030), the City Treasurer (Chief Financial Officer) is required to provide a quarterly report and certification to the City Council, City Manager, and City Auditor.
Starting July 1, 2022, the City moved to having two portfolio managers managing separate portions of the City’s Reserve portfolio. Both Quarterly Investment Reports and Certification for the quarter ending March 31, 2024, are provided as required (Attachments A and B). This report is presented as required and will bring the City current on its reporting requirements.
The City’s consolidated investment portfolio was approximately $942.5 million as of March 31, 2024, which represents an increase of $30 million from the prior market value reported on December 31, 2023. This consolidated investment portfolio includes the City’s liquidity position, short-term investments, and the reserve portfolios (as shown on page 16 of Attachment A). The total market value-based earnings for the most recent quarter are shown on page 24 for PFM Asset Management (PFMAM) & page 94 for Chandler Asset Management (Chandler) of Attachment A. Additionally, the City’s liquidity holding in both California Asset Management Program (CAMP) and Local Agency Investment Fund (LAIF), with combined holdings of $61.5 million, with an interest earning of $830,782 for the quarter ended March 31, 2024.
DISCUSSION
Background
To comply with state law and City policy, the City is required to present a quarterly certification and investment reports detailing the City’s investment portfolio to the City Council, City Manager, and City Auditor. The City also posts monthly transaction reports to the City’s website. The Quarterly Investment Report shall include a complete description of the portfolio, the types of investments, the issuers, maturity dates, par value, and dollar amounts invested in all securities, investments, or programs that are under the management of contracted parties, including lending programs. The certification must provide assurances that investments were made consistent with the City’s Investment Policy and that the City will meet its expenditure obligations for the next six months. The authority of the Council to invest, reinvest funds, sell, or exchange securities is delegated to the City’s Chief Financial Officer, who also serves as City Treasurer (Resolution #2022-06-21-1601). Pursuant to the Investment Policy, the City Treasurer may and does delegate some fiduciary responsibility to outside investment management firms. An investment manager’s fiduciary responsibility is a legal requirement related to registration with the Securities and Exchange Commission under the Investment Advisor Act of 1940.
Due to the specialized services and expertise required to assist the City in the varied investment options available, the City contracts with two experienced investment managers, PFMAM and Chandler.
Present Situation
The attached report (Attachment A) details the activities of the quarter ended March 31. 2024, and includes detailed information on the holdings of the City’s portfolio on that date, as aggregated in the first page of Attachment A, followed by portfolio reports from both investment managers. Incorporated by reference is a certification (Attachment B) that the assets comply with the requirements of State law and City policy and that there is sufficient liquidity to cover the subsequent six months of budgeted activities.
The attached quarterly investment report has been published online along with monthly reports: Quarter ended March 31, 2024.pdf (revize.com) <https://cms3.revize.com/revize/stockton/Documents/Government/Budget%20And%20Financial%20Reports/Debt%20and%20Investments/Quarterly/Quarter%20ended%20March%2031,%202024.pdf>
Portfolio Balances and Performance
The first quarter of 2024 was characterized by continued economic resilience led by strong consumer spending, inflation that continues to slowly grind lower, and a robust labor market. The Federal Reserve (Fed) kept the overnight rate at its current target range of 5.25% to 5.50% at its March 20 meeting, as expected, marking the fifth consecutive pause following the last rate hike in July 2023. The Fed’s March “dot plot” implied three 0.25% rate cuts through 2024, while the number of cuts implied for 2025 was reduced from three to two. Markets entered the year pricing in over six cuts in 2024 but, by quarter end, converged to Fed projections. Yields increased notably higher during the quarter with the return of the Fed’s “higher-for-longer” stance. The yield on the 2-, 5-, and 10-year U.S. Treasuries rose 37 basis points (bps) (0.37%), 37 bps, and 32 bps, respectively. As a result of higher absolute yields, U.S. Treasury indices with longer durations generated negative total returns, with the breakeven point around the two-year maturity, as realized earnings weren’t enough to offset unrealized market value losses in longer-maturity securities. For example, the ICE BofA 3-, 5-, and 10-year U.S. Treasury indices returned -0.21%, -0.76%, and -1.61%, respectively.
The City divides its investment portfolio into Reserve and Liquid portions with a consolidated market value of approximately $942.5 million as of March 31, 2024. The Reserve portion represents the long-term assets managed by PFMAM and Chandler, and the Liquid portion represents funds invested in several short-term investment vehicles including State of California Local Agency Investment Fund, California Asset Management Program, and Dreyfus Treasury Money Market, to maintain adequate liquidity and optimize returns. The total returns on the consolidated portfolio for the third quarter of the fiscal year were positive, as interest earnings offset unrealized market value losses.
The performance of the reserve portion of the portfolio is managed against a benchmark. The PFMAM portfolio benchmark is made up of 80% of the ICE Bank of America (BofA) 1-5 Year AAA-A U.S. Corporate and Government Index and 20% the ICE BofA 5-10 Year U.S. Treasury Index. The Chandler portfolio benchmark is the ICE BofA U.S. Issuers 1-5 Year AAA-A U.S. Corporate/Government Index. The benchmarks generally reflect each portfolio’s strategy and composition. City staff works closely with both PFMAM and Chandler to monitor the status of the City’s investment portfolios and their returns. For the quarter, the total return performance of the portfolios was negatively impacted by rising interest rates. The Chandler-managed portfolio, with its relatively shorter duration strategy, returned slightly positive performance for the quarter, while the longer-duration PFMAM managed portfolio’s performance was slightly negative--both portfolios outperformed their respective benchmark. These returns are detailed on page 24 for PFMAM and page 94 for Chandler in Attachment A. The quarterly return valuation includes funds from all activities, restricted and unrestricted, and includes changes in fair market value (unrealized gains/losses).
The City’s investment portfolio complies with California Government Code section 53601. It is invested solely in fixed-income securities (no stock holdings) that, while earning certain rates of interest, gain in market value when interest rates fall and lose market value when interest rates rise.
Looking ahead, Fed guidance has pointed to rates staying higher for longer as the Fed remains committed to restoring inflation to its long-term target of 2%. As such, yields are likely at or near cycle highs, and we expect the general trend will be for lower interest rates over the next several quarters as an eventual Fed cut approaches.
FINANCIAL SUMMARY
There is no financial impact related to the presentation of these reports.
Attachment A - Quarterly Investment Report for Quarter Ended March 31, 2024
Attachment B - Certification of Quarterly Investment Report